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                   Privatizing Welfare By Funding It
                   With a Double-Value Tax Deduction:
        
             Imagine Cutting Welfare Taxes 71 Percent Less
            But Increasing Welfare Handouts Over Threefold!
        
                         by Roleigh Martin [1]
                             June 26, 1994
        
        My policy making philosophy is simple: in contrast to
        extremists that the ends justify the means, I contend
        that the means must be justified and that the means
        dictate whether the actualized ends are justifiable.
        Empirically, I believe that the choice of means almost
        always predetermines whether the desired ends will be
        obtained. The argument today about welfare varies
        between those liberals who are concerned about the need
        for welfare and those conservatives who are concerned
        about the actual impacts of welfare.  The conservatives
        to date have taken two positions that are self-
        defeating: either they have argued for the abolition of
        welfare and the civic good-mindedness of the community
        rejects that or they have argued for restructuring
        welfare with a tax-based workfare program which is
        still redistributionist and hence, non-conservative.  A
        third position can be advanced -- one that centers
        itself on the means -- how welfare is funded.
        
        As a seated alternate to this year's Minnesota state
        GOP convention, I discussed this idea with a few state
        legislators who have asked for a detailed paper.  I
        confirmed my hunch that under the existing welfare
        system, about 25 cents on the collected-tax dollar
        targeted for welfare finds its way into a welfare-
        recipient's hand.  The balance goes to the tax
        collecting system and the welfare bureaucracy.  Yet
        private sector welfare agencies are able to pass along
        anywhere from 80-90 cents on the collected dollar to
        recipients.
        
        Imagine the following welfare system -- keep in mind it
        is flexible enough to handle anticipated rare problems
        -- it's flexibility will be explained afterwards.
        Imagine the State Government announces that welfare
        will henceforth not be tax-funded at all and instead
        will be funded by a double-value state tax deduction
        and private sector welfare agencies.  A double-value
        tax deduction (DVTD) means that if an individual
        contributes one dollar to a private sector welfare
        agency, he or she is able to deduct two dollars as a
        charitable contribution on his or her state income tax.
        
        Immediately an astute reader has one concern: what
        about donations to non-welfare charities?  To avoid
        having this double-value tax deduction drain away all
        charitable contributions to the existing single-value
        tax deductions (i.e., a dollar given is a dollar
        deducted), the tax law could require that the ratio of
        DVTD dollars must be a 1:2 ratio with single-value tax
        deducted dollars.  That is, an individual if he or she
        wanted to donate $300 to private sector welfare
        agencies would have to also donate $600 to non-welfare
        private sector charitable/educational agencies in order
        for that $300 welfare donation to count as a double-
        value tax deduction.  (In the absence of the 1:2 ratio,
        the contributor could still obtain a single value tax
        deduction, of course.)
        
        By "private sector welfare agencies," I am referring to
        any lawfully recognized 501(c)3 charitable
        organization, whether religiously involved or not,
        whether locally based or nationally known.  The
        proposed legislation will have to somehow provide a
        mechanism to distinguish those 501(c)3 charitable
        organizations that are engaged in qualified welfare
        operations versus those that aren't.
        
        The State could require the following four items of
        information to be collected by the private sector
        welfare agencies: the social security number of the
        recipient, the dollar amount received, date, and tax ID
        number of the private-sector welfare agency.  From the
        information collected,  information can be summarized
        and reported in two forms: -- to the public, they will
        be able to determine which private sector welfare
        agencies are most efficient at getting recipients "back
        on their feet" off of welfare; -- to the private-sector
        welfare agencies, they will be informed if individual
        recipients they are serving are also collecting money
        from other welfare agencies.  The private sector
        charitable agencies should not have access to records
        in the original database that has real SSN data for
        people who are not receiving nor requesting to receive
        welfare benefits from the individual agency.
        
        The collecting of money from more than one private
        sector welfare agency would be totally legal, as long
        as the recipients are not lying under contract laws if
        any of the private-sector welfare agencies have their
        recipients sign forms stating they agree under private-
        sector contract law that they have filled out their
        form truthfully as a contractual condition for
        obtaining the private welfare assistance.  You see,
        there is no need for state intervention in the agency
        forms and procedures used -- existing contract law can
        handle that.  The only thing the State needs to concern
        itself with are the four items of information earlier
        listed -- the free market can handle the rest.  You
        see, some welfare agencies may be more generous than
        others -- some may want to piggyback other agency's
        efforts. Let the donating private-sector determine by
        their voluntary contributions what agencies are worthy
        of their donations.
        
        A modified duplicate of the State's database should be
        made public for private-sector scholarly analysis where
        the individual Social Security numbers (SSN) are
        randomly altered but in a consistent manner.  For
        instance, a SSN of 123-456-7890 could become ABC-ZXY-
        EIMN but all occurrences of 123-456-7890 would become
        the same.  Yet, 123-456-7891 might (under
        randomization) become HAT-BCE-MLOP.  The idea is that
        there is no consistent algorithm to allow one to
        reverse the alteration from the alphabetized SSN to
        it's original numeric SSN. [2]
        
        In this welfare system, competition would be abundant.
        Existing charitable contributions would continue under
        the required ratio 1:2 tax law.  But the government
        only needs to spend less than one-seventeenth of  what
        it spends now to have welfare recipients receive the
        same amount of money!  That assumes several things,
        first, that income taxes in the state average 8.5 cents
        on the dollar.  A new tax deduction reduces state
        revenue from taxes collected by 8.5 percent of the
        amount deducted.  DVTD would reduce state revenue from
        taxes collected by 17 percent of the amount deducted.
        One billion dollars from taxes collected for welfare
        now means $250 million to welfare recipients --
        remember the other 75 percent goes to the cost of
        collecting taxes and the welfare bureaucracy.  Assume
        that private sector welfare agencies, plus the cost of
        computerizing and reporting the gathered four pieces of
        information reduces the average efficiency of private
        sector welfare agencies to 75 cents on the dollar level
        (the existing range reported in the general press is
        between 80-95 percent efficiency).  To get $250 million
        to welfare recipients via the DVTD method requires only
        $56.7 million of "lost taxes" due to the tax deduction.
        17.6 times less revenue is required!
        
        A liberal state, such as Minnesota, could adopt this
        method and allow up to five times as much money to be
        given to recipients than the existing system yet still
        reduce the tax burden by over 71 percent!
        
        The table on the next page shows the mathematics
        involved.  In the table is a reference to "triple-value
        funding" -- I'll explain that later.
        
        
        
                           The Moral Benefits
        
        The worst thing about welfare today, as it is has been
        funded since the days of President Roosevelt, is that
        the money collected is through the power of the gun --
        the power of the state that backs the tax law rests on
        force that will be used if the taxes are refused.  The
        message sent by the current funding method is that the
        recipients consider it a guaranteed entitlement -- a
        governmental right.  The children of the recipients are
        being given the message that their parent (normally,
        only a single parent is involved) is entitled to money
        because the parent is a victim.  And then the child is
        taught, particularly if the child is Black or Indian
        that they are still being victimized by racism.  It is
        only a graduated--distorted though--step of logic for
        the child to wrongly infer that since the force of guns
        (through Tax Law) is being used to take other people's
        money for his parent, that the child has the right to
        also use force to get money for his own needs,
        particularly since he is told everywhere that he or she
        is an underdog because of institutionalized racism.
        This is speculation but does it help explain some of
        our crime statistics?  Now I know that this paragraph
        is awful blunt and politically incorrect--but the
        juvenile criminal facts bear this out.  Prior to
        welfare by taxation, the juvenile poor--even the
        juvenile racial minorities--were very well behaved.
        Check your history.
        
        Under the DVTD Method, no such message will be sent to
        the children of welfare recipients.  The giving is
        entirely voluntary.  Not a single individual is forced
        to make the donation to obtain the tax deduction.  It
        isn't taxes collected but state tax revenue lost by the
        existence of the deduction. Recipients will know and so
        will their children that the money they receive is
        through the generosity and love of their fellow
        citizens.  People do not make money or save money
        through tax deductions.  If I donate a dollar under the
        DVTD method, I reduce my state taxes by 17 cents but I
        reduce my retained revenue by one dollar.  Yet
        Americans are very generous people. They will give to
        private sector welfare agencies.
        
        ---------------------------------------------------------------------------
            The Double-Value Tax Deduction Welfare Method v. Current Method*
        
                        Tax                           System   What         Percent
                        impact for                     over-   welfare      diff. of
        Funding         revenue         Revenue        head    recipients   needed
        method          pool**          pool           pct     would get    taxes
        
        Current         $1,000,000,000  $1,000,000,000 75.00% $250,000,000
        Double-Value    56,666,667      333,333,333    25.00%  250,000,000   5.67%
        Triple-Value    85,000,000      333,333,333    25.00%  250,000,000   8.50%
        
                         Tax impact     What welfare
                         if 5 times      recipients
        Size of Double     larger        would get
        Value Pool      56,666,667      283,333,333          1,250,000,000
        
        * See data assumptions in text.
        ** The tax impact for the double- & triple-value deduction methods
        refers to "taxes lost" due to the deduction.  The cost of the state
        database operations are not shown.
        ---------------------------------------------------------------------------
        
        One legislator asked me what if up-state people in the
        countryside do not give enough to private sector
        welfare agencies?  Well, some of the metro (down-state)
        donations could be to state-wide private sector
        agencies.  Secondly, if the DVTD method is not pumping
        enough money into private sector welfare agencies, the
        state could make it a triple-value tax deduction. That
        is, a dollar donated is a three dollar tax deduction.
        The table presented above shows how even a triple-value
        tax deduction reduces the impact on tax revenue 11.7
        times less!
        
        What is the difference in this moral message?  If
        someone voluntarily helps you out when you are down,
        don't you not want to abuse the favor?  Don't you want
        to quickly get yourself back on your feet?  Don't you
        want to get yourself back well enough on your feet to
        be able to pay back the favor -- if not to the person
        who helped you -- then at least to other people who
        become desperate as you once did?  Yet, if any of you
        collected public assistance -- whether food stamps,
        unemployment or what not, did it make you have the
        above feelings?  Of course not! You felt entitled to it
        -- you felt it was yours and you weren't grateful to
        anyone--were you?  The only thing you might have felt
        grateful for was big government.  That is an awful
        thing in America to instill into people.  Under the
        DVTD method, individuals will feel grateful to the
        goodness of private-sector individuals and not to big
        government.
        
        This is obviously a conservative philosophy approach to
        funding welfare.  I hope readers will broaden their
        appreciation for this approach and read the
        historically insightful book of Marvin Olasky, The
        Tragedy of American Compassion (Washington, D.C.:
        Regnery Gateway), 1992.
        
        
                       Meeting Various Obstacles
        
        Mr. John H. Fund in the June 14th, 1994, Wall Street
        Journal editorial page, in "Welfare: Putting People
        First," advocates a similar approach but using a tax
        credit versus a modified tax deduction.  The problem
        with a tax credit is that it impacts tax revenue 5.88
        times as much as the DVTD method and the message sent
        to recipients is no longer that of love--for giving is
        no longer a voluntary financial sacrifice of the giver-
        -the sacrifice is no longer there.  Furthermore, Mr.
        Fund's approach lacks the information feedback that
        exists in the DVTD method and without that, recipients
        could abuse the system through approaching multiple,
        competing private-sector welfare agencies and the
        underclass could conceivably grow.
        
        Last, to pass this proposal, there will have to be more
        political groups behind it than for maintaining the
        existing system.  If we advocate the generous approach
        of reducing the impact on state tax revenue by
        threefold but increasing the pass-through revenue to
        recipients by fivefold, it should be easy to get
        welfare recipients to vote for the change -- it's been
        said that change is always resisted unless the
        improvement is seen as overwhelmingly to one's benefit.
        With the ratio of DVTD to normal charitable tax
        deductions 1:2, or whatever it must be to gain the
        support of existing charitable organizations, it will
        be greatly advantageous to these private sector
        organizations for they will see tremendous growth.
        Conservatives, including welfare-conservative minded
        Democrats, should naturally favor the DVTD method over
        the current method or any tax-funded workfare approach.
        That leaves the welfare bureaucrats and diehard
        statists as the main opponents of DVTD. Given a good
        campaign, DVTD should be easy to pass into law,
        especially if it tried and succeeds at a county level
        first.
        
        DVTD can be easily tuned to fit disfavorable conditions
        by adjusting either the tax deduction -- go for a
        triple-value or quadruple-value tax deduction for
        instance, or by adjusting the DVTD to normal tax
        deduction donation ratio -- perhaps 1:2 or 1:3 or 1:4.
        Because of this flexibility, target spending can be
        approximately met even though this is not a central-
        planning/funding setup.
        
        The main point is that with the double-value tax
        deduction method, the means are justifiable and are
        most likely the best means to obtain ends that we can
        justify proudly.  Free market competition in charity
        will rule and once again, as the generous in America
        did in the 19th century, we can be seen as caring
        neighbors in the community to the lesser well-off
        citizens who will be helped in an environment of
        freedom to choose which method (source of help) do they
        want to turn to for help to get back on their feet.
        Just as the well-off people have freedom of choice,
        let's enable all Americans to have freedom of choice to
        determine how they struggle through life -- not just
        after they get back on their feet but before that.
        It's time that all Americans, rich and poor, once again
        treasure freedom of choice!
        
        
                         Questions and Answers
        
        I submitted the initial draft of this proposal to
        newsgroups on the Internet and on Compuserve.  I
        received very enthusiastic support for the proposal--no
        opposition--but I did receive several questions for
        which the answers are hard to retroactively fit into
        the main text.  These questions and answers follow.
        Please note that the questions and attitudes in these
        questions are not mine!  Some of the attitudes in these
        questions are harsher than my own!
        
        Question 1:  "On the whole, I like the idea.   However,
        I am not sure of the justification of the 1:2
        requirement.  Allowing for my incomplete knowledge of
        relevant law, aren't all charities set up for public
        service in one form or another?   Should welfare
        charities be singled out over, say, the Red Cross, or
        the local community theater?   Do Goodwill and the
        Salvation Army count?   How about the United Way? Where
        is the line drawn on welfare vs. non-welfare charities?
        I would prefer to see the double tax deduction for all
        charities."
        
        Answer 1:  In the public's eye there are two types of
        public services needed -- those that are so vitally a
        matter of life and death that the public has decided
        not to leave them to voluntary contributions such as
        welfare versus those considered of a lesser urgency but
        still desired for which the public allows them to have
        a tax-deduction status but funding is otherwise left up
        to voluntary contributions.  This proposal maintains
        that distinction and separates the two "camps" via the
        single versus the multiple-value tax deduction (i.e.,
        in case the double-value tax deduction does not raise
        enough money, the concept allows a triple-value, etc.,
        tax deduction to be created).  As said earlier, the
        enabling legislation will have to have a mechanism to
        distinguish those charities engaged in welfare versus
        non-welfare operations.
        
        Question 2: "Don't give it to them, make them get out
        from in front of their TV's or out of their beds and
        work for their welfare.  There is enough litter to be
        picked up, ditches to be dug, etc."
        
        Answer 2:   The individual private sector agencies
        could require work for the handout; it'd be up to the
        market to decide if they want to only fund work-
        requiring private sector welfare agencies.
        
        Question 3:  "My personal problem with welfare today is
        I do not believe that a person who does not work should
        receive more money/benefits than a person who does."
        
        Answer 3: The private sector agencies under my plan
        don't necessarily have to use the donations to give
        cash handouts to welfare recipients -- it's whatever
        the marketplace would determine -- it might decide to
        go for private sector training/boarding schools that
        provide on-the-job training/work and room/board to
        welfare families.  Such jobs might be quite
        unattractive to non-welfare recipients but attractive
        to those at the bottom of the latter.  Rather than have
        elitists decide, I'm in favor of the charitable
        marketplace deciding.  No one is forced to donate under
        my proposal.  You can save your own money if you want.
        
        Question 4:  "Will there be a tax reduction for
        everyone since the state will no longer be paying for
        welfare?"
        
        Answer 4:  There would be a reduction in state
        government spending equal to the amount of the current
        welfare setup. Taxes collected will be reduced the same
        less the small fraction of "taxes lost" due to the tax
        deduction (see the data table shown above).
        
        Question 5: "How does the federal portion of welfare
        fit into your plan?"
        
        Answer 5:  The state would apply for a waiver from
        federal government and the U.S. Congressmen/Senator
        from the State would be wise to ask for whatever money
        it's entitled to to go to other projects however I'd
        prefer a tax rebate to taxpayers.
        
        Question 6:  "How is the benefit amount determined?"
        
        Answer 6:  Totally left up to individual agencies and
        the marketplace.  Significant abuse would not be able
        to happen because of the database/reporting features.
        Any abuse would be made public and the marketplace
        would stop donating.  Normal 501(c)3 charitable laws
        would be in force to prevent criminal abuse by the
        private sector agencies.
        
        Question 7:  "Will the recipient ever have to go to
        more places under your plan than they do today?"
        
        Answer 7:  That may or may not be the case--but if they
        do, the agencies handing out benefits, work or money to
        them will be told via the database reporting mechanism.
        
        Question 8:  "How does the recipient determine which
        agencies they go to?"
        
        Answer 8:  The same way people make decisions about the
        marketplace today--they learn from advertisements, word
        of mouth, libraries, or consumer guide agencies.
        
        Question 9:   "Please explain how the different
        agencies can give different benefits. If I was an
        agency I would give all the money to one recipient--
        myself!"
        
        Answer 9:  You'd be in violation of 501(c)3 charitable
        contribution laws and quickly be in deep trouble.
        Nobody would want to donate to any agency that isn't a
        501(c)3 charitable agency.  Each 501(c)3 agency has
        information they publish that they use to attract
        donations. Within the constraints of 501(c)3 laws and
        marketplace feedback with the database reporting
        mechanism, different agencies can do very different
        things. That's the whole idea--to introduce
        consumer/payor-marketplace sensitivity and competition
        to welfare.
        
        Question 10:  "I personally don't agree that recipients
        will get off welfare because good hearted Joe is giving
        him the money rather than the government."
        
        Answer 10:  The private sector agencies are under no
        obligation to give any money to such abusers--no one is
        entitled to a single penny under my proposal.  The
        recipients could really have to prove their case.  Now
        some bleeding-heart do-goody agencies might be easier
        to rip off--but only bleeding-heart softies would
        donate to them--which is their right--it's their money.
        The more astute people will be more discerning with
        their money.
        
                                  ***
        
        1. The author has a Master's degree in Sociology (1977)
        and works in the private sector as a Knowledge
        Engineer.  He is also President of Applied Foresight,
        Inc. of Edina, Minnesota, which publishes two
        electronic magazines--ShareDebate International (edited
        by the author) and Imprimis Online (edited by Ronald
        Trowbridge of Hillsdale College, Michigan) --devoted to
        innovation in politics appreciative of the free market
        that are carried on thousands of computerized Bulletin
        Boards around the world, featuring such authors as
        Nobel Laureate Milton Friedman, Ben Bova, Jerry
        Pournelle, William Tucker, Doug Bandow, Thomas Sowell
        and over 50 other noted writers.
        
        The author's address is 5511 Malibu Drive, Edina,
        Minnesota 55436.  Phone: 612-945-6529 (work hours),
        612-933-3092 (home). Internet: rol@uhc.com.  Compuserve
        ID: 71510,1042.  Fax: 612-945-6502 (at office- include
        cover sheet).
        
        2. Researchers do not need SSN data but statisticians
        wants raw data so that they have control over
        aggregation and disaggregation analysis; hence the need
        to scramble SSNs because the SSN data is too
        confidential to be made public to them. However the
        private sector welfare agencies need to be informed if
        their clients are getting contributions from more than
        one agency (which again, if individual rules allow it,
        would be okay; but it would be up to individual agency
        rules--all enforced by contract law if they so wish);
        hence the need for a database with the SSN data kept
        intact.  Thus two databases are needed.
        
                                  ###
